' ITEM NO.1B COURT NO.3 SECTION IX
S U P R E M E C O U R T O F I N D I A
RECORD OF PROCEEDINGS
CIVIL APPEAL NO(s). 5440 OF 2002
BOOZ-ALLEN & HAMILTON INC. Appellant (s)
VERSUS
SBI HOME FINANCE LTD. & ORS. Respondent(s)
Date: 15/04/2011 This Appeal was called on for judgment today.
For Appellant(s) Mr. Vikas Mehta,Adv.
For Respondent(s) M/S Suresh A. Shroff & Co.,Adv.
Hon'ble Mr. Justice R.V. Raveendran pronounced the
judgment of the Bench comprising of His Lordship and
Hon'ble Mr. Justice J.M. Panchal.
The appeal is dismissed in terms of the signed
reportable judgment.
( Ravi P. Verma ) ( M.S. Negi )
Court Master Court Master
[Signed reportable judgment is placed on the file]
Reportable
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO.5440 OF 2002
Booz Allen and Hamilton Inc. ... Appellant
Vs.
SBI Home Finance Ltd. & Ors. ... Respondents
J U D G M E N T
R.V.RAVEENDRAN, J.
The scope of section 8 of the Arbitration and
Conciliation Act, 1996 (Act, for short) arises for
consideration in this appeal by special leave.
2. Capstone Investment Co. Pvt. Ltd. (second respondent
herein, for short "Capstone") and Real Value Appliances
Pvt. Ltd. (respondent No.3 herein, for short "RV
Appliances") are the owners of flat No.9A and 9B
respectively situated at "Brighton", Napien Sea Road,
Mumbai. Capstone and RV Appliances had borrowed loans from
SBI Home Finance Ltd., (the first respondent herein, for
short "SBI") under two loan agreements dated 3.12.1994 by
securing the said two flats in favour of SBI.
3. Under two leave and licence agreements dated
5.4.1996, Capstone and RV Appliances permitted the
appellant to use their respective flats, for the term
1.9.1996 to 31.8.1999. Each licence agreement was signed,
in addition to the licensor and licensee, by the other flat
owner (that is RV Appliances in respect of agreement
relating to 9A and Capstone in respect of agreement
relating to 9B) and SBI as confirming parties 1 and 2.
4. On the same day (5.4.1996) a tripartite deposit
agreement was entered among RV Appliances and Capstone as
the first party, appellant as the second party and SBI as
the third party. Under the said agreement, the appellant
paid a refundable security deposit of Rs.6.5 crores to
Capstone and RV Appliances (at the rate of Rs.3.25 crores
for each flat). Clause (E) of the said agreement confirmed
that the appellant made the said deposit and Capstone and
RV Appliances received the said deposit on the basis of the
terms and conditions recorded in the two leave and licence
agreements and the deposit agreement; and that the three
agreements together formed a single integral transaction,
inseparable, co-extensive and co-terminus in character. Out
of the said deposit of Rs.6.5 crores, a sum of Rs.5.5
crores was directly paid to SBI on the instructions of
Capstone and RV Appliances towards repayment of the loan
taken by Capstone and Real Value and the balance of Rs.1
crore accounted in the manner indicated therein. As a
consequence, the loan due by Capstone to SBI in regard to
flat No.9A was cleared, but the loan taken by RV Appliances
remained due and outstanding. Capstone however became a
guarantor for repayment of the amount due by RV Appliances
and flat No.9A was secured in favour of SBI and a charge
was created in the shares relating to flat No.9A belonging
to Capstone in favour of SBI, as security for repayment of
the loan by R V Appliances. We extract below the relevant
portion of para 5A of the agreement :
"However, notwithstanding the repayment of the
dues of Capstone Investment Co.Pvt.Ltd., the
share Nos.4001 to 4250 of the Society and Flat
No.9A shall continue to be available to the
Party of the Third Part as security of the
remaining dues of Real Value Appliances Ltd.,
and in this connection it is agreed that upon
liquidating the dues of Capstone Investment
Co.Pvt.Ltd., and in order to make available the
said shares Nos.4001 to 4250 and Flat No.9A as
security, Capstone Investment Co.Pvt.Ltd. shall
become a Guarantor for repayment of dues of Real
Value Appliances Pvt.Ltd. The Parties of the
Third Part are confirming that it has no
objection to the Party of the Second Part, its
employee or officer occupying the Flats and that
as long as the balance of the principal amount
and interest due thereon is paid by the Parties
of the First Part (or as per arrangement
hereafter recorded) by the Party of the Second
Part to Party of the Third Part, the Parties of
the Third Part shall not enforce the mortgage
and will permit the Party of the Second Part,
its employee or officer to occupy the said
Flats."
Clause (3) of the Deposit agreement gave an option to the
appellant who opted to continue the licence in respect of
the two flats for a further period of two years beyond
31.8.1999, by paying an additional deposit of Rs.2 crores
(at the rate of Rs.1 crore for each flat). Clause (11)
enabled the appellant to continue to use and occupy the
flats so long as the amounts paid by it as security deposit
remained unpaid.
Clause (8) gave the option to the appellant to pay the
amount due to the SBI on behalf of the borrowers to
safeguard its interest. Relevant portion of para 8 is
extracted below:
"If any default is made by the Parties of the
First Part in paying any sum(s) due from time to
time by them to the Parties of the Third Part
under the loan facility, the Party of the Second
Part shall, to safeguard its interest in
retaining the right to use and occupy the said
Flats, have an option to pay the Parties of the
Third Part the sum(s) so becoming due and
remaining unpaid by the Parties of the First
Part, on their behalf."
Clauses (9) and (10) provide that at the end of the
licence period, Capstone and R V Appliances shall jointly
and severally be liable to refund the deposit amount along
with interest thereon from the date of expiry of the
licence to date of actual payment
Clause (16) of the deposit agreement provided for
arbitration and is extracted below:
"In case of any dispute with respect to creation
and enforcement of charge over the said shares
and the said Flats and realization of sales
proceeds therefrom, application of sales proceeds
towards discharge of liability of the Parties of
the First Part to the parties of the Second Part
and exercise of the right of the Party of the
Second Part to continue to occupy the said Flats
until entire dues as recorded in Clause 9 and 10
hereinabove are realized by the party of the
Second Part, shall be referred to an Arbitrator
who shall be retired Judge of Mumbai High Court
and if no such Judge is ready and willing to
enter upon the reference, any Senior Counsel
practicing in Mumbai High Court shall be
appointed as the Sole Arbitrator. The Arbitrator
will be required to cite reasons for giving the
award. The arbitration proceedings shall be
governed by the Arbitration and Conciliation
Ordinance 1996 or the enactment, re-enactment or
amendment thereof. The arbitration proceedings
shall be held at Mumbai."
5. In or about July 1997 a reference was made by RV
Appliances to the Board of Industrial and Financial
Reconstruction (BIFR for short) under the Sick Industrial
Companies (Special Provisions) Act, 1985 and in pursuance
of it, flat 9B was taken over by the official liquidator.
6. By letter dated 4.8.1999, appellant informed
Capstone and RV Appliances that it was not interested in
exercising the option to renew the licences on expiry of
the leave and licence agreements on 31.8.1999 and called
upon the licensors to refund the security deposit of Rs.6.5
crores, assuring that it would vacate and deliver up the
licensed flats on receipt of the deposit amount. The
appellant informed SBI and BIFR about it by endorsing
copies of the said letters to them. As there was no
confirmation from Capstone and RV Appliances that they
would refund the sum of Rs.6.5 crores, the appellant wrote
a further letter dated 26.8.1999 stating that it would
continue to occupy the flats if the security deposit was
not refunded.
7. As the loan amount due by RV Appliances was not
repaid, SBI filed a mortgage suit (Suit No.6397/1999) in
the High Court of Bombay on 28.10.1999 against Capstone
(first defendant), appellant (second defendant), and RV
Appliances (defendant No.3) in regard to the mortgaged
property (flat No.9A) for the following reliefs:
(a) for a declaration that the 1st defendant as
mortgagor was due in a sum of Rs.8,46,10,731/-
with further interest on the principal sum at
the rate of Rs.16.5% per annum and additional
interest for delayed payment at the rate of 2%
per month from 1st September, 1999 till payment
or realization;
(b) for a declaration that the amount and interest
mentioned in prayer (a) above is secured in
favour of the plaintiffs by a valid and
subsisting mortgage of flat No.9A and three
garages (suit premises);
(c) for a direction to the first defendant to pay
to the plaintiff the amount and interest in
prayer (a) by such date as may be fixed by the
Court for redemption of the mortgage and in the
event of the first defendant failing to make
payment by that date, the suit premises be sold
by and under the orders and directions of the
Court in enforcement and realization of the
mortgage thereon and the net realization
thereof be paid over to the plaintiff in or
towards satisfaction of its claim herein;
(d) for a personal decree against the first
defendant to the extent of any deficiency in
sale realization;
(e) that the second defendant be ordered to vacate
the suit premises and hand over possession
thereof to the plaintiff to enable the
plaintiff effectively to enforce and realize
its security thereon."
8. On a notice of motion taken out by SBI seeking
interim relief, the High Court issued the following order
on 25.11.1999 :
"The Defendant No.2 shall continue to occupy Flat
No.9A and garages Nos. 45 to 47 situate at
Brighton, 68D, Napean Sea Road, Mumbai but shall
not create any third party right or interest of
any nature whatsoever in the said flat nor shall
hand over possession of the said flat to
defendant No.1 or 3 till further order.
Mr. Dharmadhikari, learned counsel for first
defendant makes a statement that till further
orders, the first defendant shall not create any
third party interest in the said flat No.9A and
garages Nos.45 to 47 nor shall alienate, dispose
of or transfer the said property till further
orders. Statement of Mr. Dharmadhikari is
accepted."
On 15.12.1999 the appellant filed a detailed reply to the
said notice of motion. It inter alia contended that SBI had
a contractual obligation towards the appellant as it had
agreed for the continuance of appellants' occupation till
refund of the deposit. Capstone also contested the
application, denying the existence of any mortgage or
charge over flat No.9A.
9. The appellant however did not file its written
statement in the suit. The appellant claims that settlement
talks were being held for some time but did not fructify
into any settlement. Therefore, on 10.10.2001, the
appellant took out a notice of motion praying that the
parties to the suit be referred to arbitration as provided
in clause 16 of the deposit agreement dated 5.4.1996 and
consequently the suit be dismissed. The said application
was resisted by the SBI.
10. A learned single Judge of the High Court by impugned
order dated 7.3.2002 dismissed the application
holding as follows:
(a) Clause 16 of the deposit agreement (arbitration
agreement) did not cover the dispute which is the subject
matter of the claim by SBI against its borrowers (Capstone
and RV Appliances) and therefore, it was not open to the
appellant to request the court to refer the parties to
arbitration.
(b) The detailed counter affidavit dated 15.12.1999
filed by the appellant, in regard to the notice of motion
for temporary injunction, amounted to submission of the
first statement on the substance of the dispute, before
filing the application under section 8 of the Act and
therefore the appellant lost the right to seek reference to
arbitration.
(c) The suit was filed on 28.10.1999. The appellant
filed the counter affidavit opposing the application for
temporary injunction on 15.12.1999. The application under
section 8 of the Act was filed on 10.10.2001 nearly 20
months thereafter, during which period the appellant had
subjected itself to the jurisdiction of the High Court. In
view of the inordinate delay, the appellant was not
entitled to the relief under section 8 of the Act.
The said order is challenged in this appeal by special
leave. This court while granting leave on 28.8.2002 stayed
the further proceedings in the suit.
11. The appellant contends that the parties to the suit
were all parties to the deposit agreement containing the
arbitration agreement. The claim of the SBI was for
enforcement of the charge/mortgage over flat No.9A and
realization of the sale proceeds therefrom, which was
specifically mentioned as a dispute which was arbitrable.
Having regard to the clear mandate under section 8 of the
Act, the court ought to have referred the parties to
arbitration. SBI supported the order
12. In S.B.P & Co. vs. Patel Engineering Ltd 2005 (8)
SCC 618, this Court held thus :
"When the defendant to an action before a
judicial authority raises the plea that there is
an arbitration agreement and the subject matter
of the claim is covered by the agreement and the
plaintiff or the person who has approached the
judicial authority for relief disputes the same,
the judicial authority, in the absence of any
restriction in the Act, has necessarily to decide
whether, in fact, there is in existence a valid
arbitration agreement and whether the dispute
that is sought to be raised before it is covered
by the arbitration clause. It is difficult to
contemplate that the judicial authority has also
to act mechanically or has merely to see the
original arbitration agreement produced before it
and mechanically refer the parties to an
arbitration."
(emphasis supplied)
Where a suit is filed by one of the parties to an
arbitration agreement against the other parties to the
arbitration agreement, and if the defendants file an
application under section 8 stating that the parties should
be referred to arbitration, the court (judicial authority)
will have to decide (i) whether there is an arbitration
agreement among the parties; (ii) whether all parties to
the suit are parties to the arbitration agreement; (ii)
whether the disputes which are the subject matter of the
suit fall within the scope of arbitration agreement; (iv)
whether the defendant had applied under section 8 of the
Act before submitting his first statement on the substance
of the dispute; and (v) whether the reliefs sought in the
suit are those that can be adjudicated and granted in an
arbitration.
13. On the contentions urged the following questions
arise for our consideration :
(i) Whether the subject matter of the suit fell within
the scope of the arbitration agreement contained in clause
16 of the deposit agreement?
(ii) Whether the appellant had submitted his first
statement on the substance of the dispute before filing the
application under section 8 of the Act?
(iii) Whether the application under section 8 was liable
to be rejected as it was filed nearly 20 months after
entering appearance in the suit?
(iv) Whether the subject matter of the suit is
`arbitrable', that is capable of being adjudicated by a
private forum (arbitral tribunal); and whether the High
Court ought to have referred the parties to the suit to
arbitration under section 8 of the Act?
Re : Question No.(i)
14. In this case, there is no dispute that all the
parties to the suit are parties to an agreement which
contains the provision for settlement of disputes by
arbitration. Clause (16) which provides for arbitration
provides for settlement of the following disputes by
arbitration : (a) disputes with respect to creation of
charge over the shares and flats; (b) disputes with respect
to enforcement of the charge over the shares and flats and
realization of sale proceeds therefrom; (c) application of
the sale proceeds towards discharge of liability of
Capstone and RV Appliances to the appellant; and (e)
disputes relating to exercise of right of the appellant to
continue to occupy the flats until the entire dues as
stated in clauses 9 and 10 of the deposit agreement are
realised by the appellant.
15. The suit has been filed by SBI to enforce the
mortgage to recover the amounts due to it. In that context,
SBI has also sought delivery of vacant possession. The
enforcement of the charge/mortgage over the flat,
realisation of sale proceeds therefrom and the right of the
appellant to stay in possession till the entire deposit is
repaid, are all matters which are specifically mentioned in
clause 16 as matters to be settled by arbitration.
Therefore, the subject matter of the suit falls within the
scope of the arbitration agreement.
Re : Question No.(ii)
16. The appellant filed a detailed affidavit opposing
the application for interim injunction on 15.12.1999.
Thereafter the appellant filed the application under
section 8 of the Act on 12.10.2001. On the date of filing
of the application under section 8, the appellant had not
filed the written statement. Section 8 of the Act provides
that a judicial authority before which an action is brought
in a matter which is the subject of an arbitration
agreement shall, if a party so applies not later than when
submitting his first statement on the substance of the
dispute, refer the parties to arbitration. The High Court
has held that filing a detailed counter affidavit by a
defendant setting out its case, in reply to an application
for temporary injunction, should be considered to be the
submission of the first statement on the substance of the
dispute; and that the application under section 8 of the
Act having been filed subsequent to filing of such first
statement on the substance of the dispute, the appellant's
prayer for referring the parties to arbitration cannot be
accepted. The question therefore is whether filing a
counter to an application for temporary injunction can be
considered as submitting the first statement on the
substance of the dispute.
17. Not only filing of the written statement in a suit,
but filing of any statement, application, affidavit filed
by a defendant prior to the filing of the written statement
will be construed as `submission of a statement on the
substance of the dispute', if by filing such
statement/application/affidavit, the defendant shows his
intention to submit himself to the jurisdiction of the
court and waive his right to seek reference to arbitration.
But filing of a reply by a defendant, to an application for
temporary injunction/attachment before judgment/appointment
of Receiver, cannot be considered as submission of a
statement on the substance of the dispute, as that is done
to avoid an interim order being made against him. In
Rashtriya Ispat Nigam Ltd vs. Verma Transport Company
2006 (7) SCC 275, this Court held that the expression
'first statement on the substance of the dispute' contained
in Section 8(1) of the Act is different from the expression
'written statement', and refers to a submission of the
party making the application under section 8 of the Act, to
the jurisdiction of the judicial authority; and what should
be decided by the court is whether the party seeking
reference to arbitration has waived his right to invoke the
arbitration clause. This Court then proceeded to consider
whether contesting an application for temporary injunction
by filing a counter, would amount to subjecting oneself to
the jurisdiction of the court. This Court observed :
"By opposing the prayer for interim injunction,
the restriction contained in Sub-section (1) of
Section 8 was not attracted. Disclosure of a
defence for the purpose of opposing a prayer for
injunction would not necessarily mean that
substance of the dispute has already been
disclosed in the main proceeding. Supplemental
and incidental proceeding are not part of the
main proceeding. They are dealt with separately
in the Code of Civil Procedure itself. Section 94
of the Code of Civil Procedure deals with
supplemental proceedings. Incidental proceedings
are those which arise out of the main proceeding.
In view of the decision of this Court in Food
Corporation of India vs. Yadav Engineer &
Contractor 1982 (2) SCC 499, the distinction
between the main proceeding and supplemental
proceeding must be borne in mind. ........ Waiver of
a right on the part of a defendant to the lis
must be gathered from the fact situation
obtaining in each case. In the instant case, the
court had already passed an ad interim ex pare
injunction. The Appellants were bound to respond
to the notice issued by the Court."
18. In this case, the counter affidavit dated
15.12.1999, filed by the appellant in reply to the notice
of motion (seeking appointment of a receiver and grant of a
temporary injunction) clearly stated that the reply
affidavit was being filed for the limited purpose of
opposing the interim relief. Even in the absence of such a
disclaimer, filing a detailed objection to an application
for interim relief cannot be considered to be submission of
a statement on the substance of the dispute resulting in
submitting oneself to the jurisdiction of the court.
Re : Question No.(iii)
19. Though section 8 does not prescribe any time limit
for filing an application under that section, and only
states that the application under section 8 of the Act
should be filed before submission of the first statement on
the substance of the dispute, the scheme of the Act and the
provisions of the section clearly indicate that the
application thereunder should be made at the earliest.
Obviously, a party who willingly participates in the
proceedings in the suit and subjects himself to the
jurisdiction of the court cannot subsequently turn round
and say that the parties should be referred to arbitration
in view of the existence of an arbitration agreement.
Whether a party has waived his right to seek arbitration
and subjected himself to the jurisdiction of the court,
depends upon the conduct of such party in the suit. When
plaintiffs file applications for interim relief like
appointment of a receiver or grant of a temporary
injunction, the defendants have to contest the application.
Such contest may even lead to appeals and revisions where
there may be even stay of further proceedings in the suit.
If supplemental proceedings like applications for temporary
injunction on appointment of Receiver, have been pending
for a considerable time and a defendant has been contesting
such supplemental proceedings, it cannot be said that the
defendant has lost the right to seek reference to
arbitration. At the relevant time, the unamended Rule 1 of
Order VIII of the Code was governing the filing of written
statements and the said rule did not prescribe any time
limit for filing written statement. In such a situation,
mere passage of time between the date of entering
appearance and date of filing the application under section
8 of the Act, can not lead to an inference that a defendant
subjected himself to the jurisdiction of the court for
adjudication of the main dispute. The facts in this case
show that the plaintiff in the suit had filed an
application for temporary injunction and appointment of
Receiver and that was pending for some time. Thereafter,
talks were in progress for arriving at a settlement out of
court. When such talks failed, the appellant filed an
application under section 8 of the Act before filing the
written statement or filing any other statement which could
be considered to be a submission of a statement on the
substance of the dispute. The High Court was not therefore
justified in rejecting the application on the ground of
delay.
Re : Question (iv)
20. The nature and scope of issues arising for
consideration in an application under section 11 of the Act
for appointment of arbitrators, are far narrower than those
arising in an application under section 8 of the Act,
seeking reference of the parties to a suit to arbitration.
While considering an application under section 11 of the
Act, the Chief Justice or his designate would not embark
upon an examination of the issue of `arbitrability' or
appropriateness of adjudication by a private forum, once
he finds that there was an arbitration agreement between or
among the parties, and would leave the issue of
arbitrability for the decision of the arbitral Tribunal.
If the arbitrator wrongly holds that the dispute is
arbitrable, the aggrieved party will have to challenge the
award by filing an application under section 34 of the Act,
relying upon sub-section 2(b)(i) of that section. But
where the issue of `arbitrability' arises in the context of
an application under section 8 of the Act in a pending
suit, all aspects of arbitrability have to be decided by
the court seized of the suit, and cannot be left to the
decision of the Arbitrator. Even if there is an arbitration
agreement between the parties, and even if the dispute is
covered by the arbitration agreement, the court where the
civil suit is pending, will refuse an application under
Section 8 of the Act, to refer the parties to arbitration,
if the subject matter of the suit is capable of
adjudication only by a public forum or the relief claimed
can only be granted by a special court or Tribunal.
21. The term `arbitrability' has different meanings in
different contexts. The three facets of arbitrability,
relating to the jurisdiction of the arbitral tribunal, are
as under : (i) whether the disputes are capable of
adjudication and settlement by arbitration? That is,
whether the disputes, having regard to their nature, could
be resolved by a private forum chosen by the parties (the
arbitral tribunal) or whether they would exclusively fall
within the domain of public fora (courts). (ii) Whether the
disputes are covered by the arbitration agreement? That is,
whether the disputes are enumerated or described in the
arbitration agreement as matters to be decided by
arbitration or whether the disputes fall under the
`excepted matters' excluded from the purview of the
arbitration agreement. (iii) Whether the parties have
referred the disputes to arbitration? That is, whether the
disputes fall under the scope of the submission to the
arbitral tribunal, or whether they do not arise out of the
statement of claim and the counter claim filed before the
arbitral tribunal. A dispute, even if it is capable of
being decided by arbitration and falling within the scope
of arbitration agreement, will not be `arbitrable' if it is
not enumerated in the joint list of disputes referred to
arbitration, or in the absence of such joint list of
disputes, does not form part of the disputes raised in the
pleadings before the arbitral tribunal.
22. Arbitral tribunals are private fora chosen voluntarily
by the parties to the dispute, to adjudicate their disputes
in place of courts and tribunals which are public fora
constituted under the laws of the country. Every civil or
commercial dispute, either contractual or non-contractual,
which can be decided by a court, is in principle capable of
being adjudicated and resolved by arbitration unless the
jurisdiction of arbitral tribunals is excluded either
expressly or by necessary implication. Adjudication of
certain categories of proceedings are reserved by the
Legislature exclusively for public fora as a matter of
public policy. Certain other categories of cases, though
not expressly reserved for adjudication by a public fora
(courts and Tribunals), may by necessary implication stand
excluded from the purview of private fora. Consequently,
where the cause/dispute is inarbitrable, the court where a
suit is pending, will refuse to refer the parties to
arbitration, under section 8 of the Act, even if the
parties might have agreed upon arbitration as the forum for
settlement of such disputes. The well recognized examples
of non-arbitrable disputes are : (i) disputes relating to
rights and liabilities which give rise to or arise out of
criminal offences; (ii) matrimonial disputes relating to
divorce, judicial separation, restitution of conjugal
rights, child custody; (iii) guardianship matters; (iv)
insolvency and winding up matters; (v) testamentary matters
(grant of probate, letters of administration and succession
certificate); and (vi) eviction or tenancy matters governed
by special statutes where the tenant enjoys statutory
protection against eviction and only the specified courts
are conferred jurisdiction to grant eviction or decide the
disputes.
23. It may be noticed that the cases referred to above
relate to actions in rem. A right in rem is a right
exercisable against the world at large, as contrasted from
a right in personam which is an interest protected solely
against specific individuals. Actions in personam refer to
actions determining the rights and interests of the parties
themselves in the subject matter of the case, whereas
actions in rem refer to actions determining the title to
property and the rights of the parties, not merely among
themselves but also against all persons at any time
claiming an interest in that property. Correspondingly,
judgment in personam refers to a judgment against a person
as distinguished from a judgment against a thing, right or
status and Judgment in rem refers to a judgment that
determines the status or condition of property which
operates directly on the property itself. (Vide : Black's
Law Dictionary). Generally and traditionally all disputes
relating to rights in personam are considered to be
amenable to arbitration; and all disputes relating to
rights in rem are required to be adjudicated by courts and
public tribunals, being unsuited for private arbitration.
This is not however a rigid or inflexible rule. Disputes
relating to sub-ordinate rights in personam arising from
rights in rem have always been considered to be arbitrable.
24. The Act does not specifically exclude any category of
disputes as being not arbitrable. Sections 34(2)(b) and
48(2) of the Act however make it clear that an arbitral
award will be set aside if the court finds that "the
subject-matter of the dispute is not capable of settlement
by arbitration under the law for the time being in force."
25. Russell on Arbitration [22nd Edition] observed thus
[page 28, para 2.007] :
"Not all matter are capable of being referred to
arbitration. As a matter of English law certain
matters are reserved for the court alone and if a
tribunal purports to deal with them the resulting
award will be unenforceable. These include matters
where the type of remedy required is not one which
an arbitral tribunal is empowered to give."
The subsequent edition of Russell [23rd Edition, page 470,
para 8.043] ] merely observes that English law does
recognize that there are matters which cannot be decided by
means of arbitration. Mustill and Boyd in their Law and
Practice of Commercial Arbitration in England [2nd 1989
Edition], have observed thus :
"In practice therefore, the question has not been
whether a particular dispute is capable of
settlement by arbitration, but whether it ought to
be referred to arbitration or whether it has given
rise to an enforceable award. No doubt for this
reason, English law has never arrived at a general
theory for distinguishing those disputes which may
be settled by arbitration from those which may
not. .......
Second, the types of remedies which the arbitrator
can award are limited by considerations of public
policy and by the fact that he is appointed by the
parties and not by the state. For example, he
cannot impose a fine or a term of imprisonment,
commit a person for contempt or issue a writ of
subpoena; nor can he make an award which is
binding on third parties or affects the public at
large, such as a judgment in rem against a ship,
an assessment of the rateable value of land, a
divorce decree, a winding-up order...."
[emphasis supplied]
Mustill and Boyd in their 2001 Companion Volume to the 2nd
Edition of commercial Arbitration, observe thus (page
73):
"Many commentaries treat it as axiomatic that
`real' rights, that is rights which are valid as
against the whole world, cannot be the subject of
private arbitration, although some acknowledge
that subordinate rights in personam derived from
the real rights may be ruled upon by arbitrators.
The conventional view is thus that, for example,
rights under a patent licence may be arbitrated,
but the validity of the underlying patent may
not.....An arbitrator whose powers are derived from
a private agreement between A and B plainly has
no jurisdiction to bind anyone else by a decision
on whether a patent is valid, for no-one else has
mandated him to make such a decision, and a
decision which attempted to do so would be
useless."
(Emphasis supplied)
26. The distinction between disputes which are capable
of being decided by arbitration, and those which are not,
is brought out in three decisions of this Court.
26.1) In Haryana Telecom Limited vs. Sterlite Industries
India Ltd 1999 (5) SCC 688, this Court held :
"Sub-section (1) of Section 8 provides that the
judicial authority before whom an action is
brought in a matter, will refer the parties to
arbitration the said matter in accordance with the
arbitration agreement. This, however, postulates,
in our opinion, that what can be referred to the
arbitrator is only that dispute or matter which
the arbitrator is competent or empowered to
decide.
The claim in a petition for winding up is not for
money. The petition filed under the Companies Act
would be to the effect, in a matter like this,
that the company has become commercially insolvent
and, therefore, should be wound up. The power to
order winding up of a company is contained under
the Companies Act and is conferred on the court.
An arbitrator, notwithstanding any agreement
between the parties, would have no jurisdiction to
order winding up of a company. The matter which is
pending before the High Court in which the
application was filed by the petition herein was
relating to winding up of the Company. That could
obviously not be referred to arbitration and,
therefore, the High Court, in our opinion was
right in rejecting the application."
(Emphasis supplied)
26.2) A different perspective on the issue is found in
Olympus Superstructures Pvt Ltd vs. Meena Vijay Khetan and
others 1999 (5) SCC 651, where this Court considered
whether an arbitrator has the power and jurisdiction to
grant specific performance of contracts relating to
immovable property. This Court held :
"We are of the view that the right to specific
performance of an agreement of sale deals with
contractual rights and it is certainly open to the
parties to agree - with a view to shorten
litigation in regular courts - to refer the issues
relating to specific performance to arbitration.
There is no prohibition in the Specific Relief Act,
1963 that issues relating to specific performance
of contract relating to immovable property cannot
be referred to arbitration. Nor is there such a
prohibition contained in the Arbitration and
Conciliation Act, 1996 as contrasted with Section
15 of the English Arbitration Act, 1950 or Section
48(5)(b) of the English Arbitration Act, 1996 which
contained a prohibition relating to specific
performance of contracts concerning immoveable
property."
Approving the decision of the Calcutta High Court in
Keventer Agro Ltd vs. Seegram Comp. Ltd (Apo 498 of 1997
etc. dated 27.1.1998), this Court held that disputes
relating to specific performance of a contract can be
referred to arbitration and Section 34(2)(b)(i) will not be
attracted. This Court held :
"Further, as pointed in the Calcutta case, merely
because there is need for exercise of discretion
in case of specific performance, it cannot be said
that only the civil court can exercise such a
discretion. In the above case, Ms. Ruma Pal, J.
observed:
...merely because the sections of the
Specific Relief Act confer discretion on
courts to grant specific performance of a
contract does not means that parties cannot
agree that the discretion will be exercised
by a forum of their choice. If the converse
were true, then whenever a relief is
dependent upon the exercise of discretion
of a court by statute e.g. the grant of
interest or costs, parties should be
precluded from referring the dispute to
arbitration."
This Court further clarified that while matters like
criminal offences and matrimonial disputes may not be
subject matter of resolution by arbitration, matters
incidental thereto may be referred to arbitration :
"Reference is made there to certain disputes like
criminal offences of a public nature, disputes
arising out of illegal agreements and disputes
relating to status, such as divorce, which cannot
be referred to arbitration. It has, however, been
held that if in respect of facts relating to a
criminal matter, (say) physical injury, if there
is a right to damages for personal injury, then
such a dispute can be referred to arbitration
(Keir v. Leeman) (1846) 9 Q.B, 371. Similarly, it
has been held that a husband and wife may, refer
to arbitration the terms on which they shall
separate, because they can make a valid agreement
between themselves on that matter .........."
26.3) In Chiranjilal Shrilal Goenka vs. Jasjit Singh and
Ors.- 1993 (2) SCC 507 this court held that grant of
probate is a judgment in rem and is conclusive and binding
not only the parties but also the entire world; and
therefore, courts alone will have exclusive jurisdiction to
grant probate and an arbitral tribunal will not have
jurisdiction even if consented concluded to by the parties
to adjudicate upon the proof or validity of the will.
27. An agreement to sell or an agreement to mortgage
does not involve any transfer of right in rem but create
only a personal obligation. Therefore if specific
performance is sought either in regard to an agreement to
sell or an agreement to mortgage, the claim for specific
performance will be arbitrable. On the other hand, a
mortgage is a transfer of a right in rem. A mortgage suit
for sale of the mortgaged property is an action in rem, for
enforcement of a right in rem. A suit on mortgage is not a
mere suit for money. A suit for enforcement of a mortgage
being the enforcement of a right in rem, will have to be
decided by courts of law and not by arbitral tribunals. The
scheme relating to adjudication of mortgage suits contained
in Order 34 of the Code of Civil Procedure, replaces some
of the repealed provisions of Transfer of Property Act,
1882 relating to suits on mortgages (section 85 to 90, 97
and 99) and also provides for implementation of some of the
other provisions of that Act (section 92 to 94 and 96).
Order 34 of the Code does not relate to execution of
decrees, but provides for preliminary and final decrees to
satisfy the substantive rights of mortgagees with reference
to their mortgage security. The provisions of Transfer of
Property Act read with Order 34 of the Code, relating to
the procedure prescribed for adjudication of the mortgage
suits, the rights of mortgagees and mortgagors, the parties
to a mortgage suit, and the powers of a court adjudicating
a mortgage suit, make it clear that such suits are intended
to be decided by public fora (Courts) and therefore,
impliedly barred from being referred to or decided by
private fora (Arbitral Tribunals). We may briefly refer to
some of the provisions which lead us to such a conclusion.
(i) Rule (1) of Order 34 provides that subject to the
provisions of the Code, all persons having an interest
either in the mortgage security or in the right of
redemption shall have to be joined as parties to any suit
relating to mortgage, whether they are parties to the
mortgage or not. The object of this rule is to avoid
multiplicity of suits and enable all interested persons, to
raise their defences or claims, so that they could also be
taken note of, while dealing with the claim in the mortgage
suit and passing a preliminary decree. A person who has an
interest in the mortgage security or right or redemption
can therefore make an application for being impleaded in a
mortgage suit, and is entitled to be made a party. But if a
mortgage suit is referred to arbitration, a person who is
not a party to the arbitration agreement, but having an
interest in the mortgaged property or right of redemption,
can not get himself impleaded as a party to the arbitration
proceedings, nor get his claim dealt with in the
arbitration proceedings relating to a dispute between the
parties to the arbitration, thereby defeating the scheme
relating to mortgages in the Transfer of Property Act and
the Code. It will also lead to multiplicity of proceedings
with likelihood of divergent results.
(ii) In passing a preliminary decree and final decree,
the court adjudicates, adjusts and safeguards the interests
not only of the mortgagor and mortgagee but also
puisne/mesne mortgagees, persons entitled to equity of
redemption, persons having an interest in the mortgaged
property, auction purchasers, persons in possession. An
arbitral tribunal will not be able to do so.
(iii) The court can direct that an account be taken of
what is due to the mortgagee and declare the amounts due
and direct that if the mortgagor pays into court, the
amount so found due, on or before such date as the court
may fix (within six months from the date on which the court
confirms the account taken or from the date on which the
court declares the amount due), the petitioner shall
deliver the documents and if necessary re-transfer the
property to the defendant; and further direct that if the
mortgagor defaults in payment of such dues, then the
mortgagee will be entitled to final decree for sale of the
property or part thereof and pay into court the sale
proceeds, and to adjudge the subsequent costs, charges,
expenses and interest and direct that the balance be paid
to mortgagor/defendant or other persons entitled to receive
the same. An arbitral tribunal will not be able to do so.
(iv) Where in a suit for sale (or in a suit for
foreclosure in which sale is ordered), subsequent
mortgagees or persons deriving title from, or subrogated to
the rights of any such mortgagees are joined as parties,
the court while making the preliminary decree for sale
under Rule 4(1), could provide for adjudication of the
respective rights and liabilities of the parties to the
suit in a manner and form set forth in Form Nos. 9, 10, and
11 of appendix `D' to the Code with such variations as the
circumstances of the case may require. In a suit for
foreclosure in the case of an anomalous mortgage, if the
plaintiff succeeds, the court may, at the instance of any
party to the suit or any other party interested in the
mortgage security or the right of redemption, pass a like
decree in lieu of a decree for foreclosure, on such terms
as it thinks fit. But an arbitral tribunal will not be able
to do.
(v) The court has the power under Rule 4(2), on good
cause being shown and upon terms to be fixed by it, from
time to time, at any time before a final decree is passed,
extend the time fixed for payment of the amount found or
declared due or the amount adjudged due in respect of
subsequent costs, changes, expenses and interest, upon such
terms as it deems fit. The Arbitral Tribunal will have no
such power.
28. A decree for sale of a mortgaged property as in the
case of a decree for order of winding up, requires the
court to protect the interests of persons other than the
parties to the suit/petition and empowers the court to
entertain and adjudicate upon rights and liabilities of
third parties (other than those who are parties to the
arbitration agreement). Therefore, a suit for sale,
foreclosure or redemption of a mortgaged property, should
only be tried by a public forum, and not by an arbitral
tribunal. Consequently, it follows that the court where the
mortgage suit is pending, should not refer the parties to
arbitration.
29. The appellant contended that the suit ultimately
raises the following core issues, which can be decided by a
private forum: (i) Whether there is a valid mortgage or
charge in favour of SBI? (ii) What is the amount due to
SBI? and (iii) Whether SBI could seek eviction of appellant
from the flat, even if it is entitled to enforce the
mortgage/charge? It was submitted that merely because
mortgage suits involve passing of preliminary decrees and
final decrees, they do not get excluded from arbitrable
disputes. It is pointed out that the arbitral tribunals can
also make interim awards deciding certain aspects of the
disputes finally which can be equated to preliminary
decrees granted by courts, and the final award made by the
arbitrator, after detailed accounting etc. could be
compared to the final decree by courts. It is therefore
contended that there is no impediment for the parties to
mortgage suits being referred to arbitration under section
8 of the Act. If the three issues referred by the appellant
are the only disputes, it may be possible to refer them to
arbitration. But a mortgage suit is not only about
determination of the existence of the mortgage or
determination of the amount due. It is about enforcement of
the mortgage with reference to an immovable property and
adjudicating upon the rights and obligations of several
classes of persons (referred to in para 27 (ii) above), who
have the right to participate in the proceedings relating
to the enforcement of the mortgage, vis-à-vis the mortgagor
and mortgagee. Even if some of the issues or questions in a
mortgage suit (as pointed out by the appellant) are
arbitrable or could be decided by a private forum, the
issues in a mortgage suit cannot be divided. The following
observations of this court in a somewhat different context,
in Sukanya Holdings (P) Ltd. v. Jayesh H.Pandya 2003 (5)
SCC 531 are relevant:
"The next question which requires consideration
is--even if there is no provision for partly
referring the dispute to arbitration, whether such
a course is possible under Section 8 of the Act?
In our view, it would be difficult to give an
interpretation to Section 8 under which
bifurcation of the cause of action that is to say
the subject matter of the suit or in some cases
bifurcation of the suit between parties who are
parties to the arbitration agreement and others is
possible. This would be laying down a totally new
procedure not contemplated under the Act. If
bifurcation of the subject matter of a suit was
contemplated, the legislature would have used
appropriate language to permit such a course.
Since there is no such indication in the language,
it follows that bifurcation of the subject matter
of an action brought before a judicial authority
is not allowed."
Conclusion
30. Having regard to our finding on question (iv) it has
to be held that the suit being one for enforcement of a
mortgage by sale, it should be tried by the court and not
by an arbitral tribunal. Therefore we uphold the dismissal
of the application under section 8 of the Act, though for
different reasons. The appeal is accordingly dismissed. We
however make it clear that we have not recorded any
finding, nor expressed any opinion, on the merits of the
claims and disputes in the suit.
.................J.
(R V Raveendran)
New Delhi; .................J.
April 15, 2011. (J M Panchal)
